Business ModelsBusiness ModelsMGT 709 New Venture CreationMGT 709 New Venture Creation

Business Model AnalysisBusiness Model Analysis(Hammermesh)(Hammermesh)

A business model is a “profit engine” or A business model is a “profit engine” or cash generating machinecash generating machine Revenue driversRevenue drivers Cost driversCost drivers Investment sizeInvestment size Critical success factorsCritical success factors

Also think about:Also think about: Value creation/capture/protectionValue creation/capture/protection

Economics of One Unit (EOU)Economics of One Unit (EOU)

Take one unit (can be a good or service)Take one unit (can be a good or service) Selling price per unitSelling price per unit lessless Cost Of Goods Sold per unit Cost Of Goods Sold per unit

MaterialsMaterials LaborLabor

=Gross Profit per unit=Gross Profit per unit

Can you drill down and defend your Can you drill down and defend your assumptions?assumptions?

RevenueRevenue TypesTypes

Single stream, multiple streams, interdependent, loss Single stream, multiple streams, interdependent, loss leaderleader

ModelsModels Subscription (gym, magazine)Subscription (gym, magazine) Volume or unit-based (typical retail)Volume or unit-based (typical retail) Advertising-based (google, TV)Advertising-based (google, TV) Licensing/syndication (biotech)Licensing/syndication (biotech) Transaction fee (realtors, brokers)Transaction fee (realtors, brokers)

Fishbone modelFishbone model

Fishbone Revenue ModelFishbone Revenue Model

COBRevenue

Tuition

Endowments

Grants

Rate of return

Size of endowments

Avg. tuition rate

# of students

Student mix

Executive education

Curriculum

Reputation

Grant applications

Quality of faculty

CostsCosts

TypesTypes Fixed, variable, semi-variable, non-recurringFixed, variable, semi-variable, non-recurring

StructuresStructures Payroll-centered (direct)Payroll-centered (direct) Payroll-centered (support)Payroll-centered (support) InventoryInventory Space/rentSpace/rent Marketing/advertisingMarketing/advertising

Fishbone Cost ModelFishbone Cost Model

COBExpenses

Faculty Salaries (80%)

Support Salaries (10%)

Operating Expenses

(10%)

# of faculty Productivity

# of staff

Salary rates

Teaching resources

Research resources

Market rates

Support ratio

Faculty mix

Investment SizeInvestment Size

Maximum financing needs (lowest point)Maximum financing needs (lowest point) Positive cash flowPositive cash flow Cash breakevenCash breakeven Cash flow diagram is useful Cash flow diagram is useful

cash balance over timecash balance over time

Cash is needed for infrastructure, salary, Cash is needed for infrastructure, salary, inventories etc.inventories etc.

Critical success factorsCritical success factors

Which factors have the greatest impact on Which factors have the greatest impact on profitability?profitability?

Sensitivity analysisSensitivity analysis

Discovery Driven PlanningDiscovery Driven Planning(McGrath)(McGrath)

The Reverse Income StatementThe Reverse Income Statement Total Figures Total Figures

Required profits to add 10% to total profits = $4mRequired profits to add 10% to total profits = $4m Necessary revenues on 10% net profit margin = $40mNecessary revenues on 10% net profit margin = $40m Allowable costs to deliver 10% sales margin = $36mAllowable costs to deliver 10% sales margin = $36m

Per Unit Figures Per Unit Figures Required unit sales at $160 per unit = 250,000 unitsRequired unit sales at $160 per unit = 250,000 units Necessary percentage of world market share of OEM Necessary percentage of world market share of OEM

unit sales = 25% unit sales = 25% Allowable costs per unit for 10% sales margin: $144Allowable costs per unit for 10% sales margin: $144

Building assumptionsBuilding assumptions

Assumption Measurement1. Profit margin 10% of sales2. Revenues $40 million3. Unit selling price $160 4. Size of OEM market 1 million drives5. Fixed asset investment to sales 1:16. Effective production capacity per line 25 drives per minute7. Effective life of equipment 3 years8. Average OEM order size 100 drives9. Sales calls per OEM order 4 calls per order10. Sales calls per salesperson per day 2 calls per day11. Selling days per year 250 days12. Annual salesperson's salary $ 100,000 13. Containers required per order 1 container14. Shipping cost per container $10,000

15. Quality level needed 50% fewer flaws

16. Production days per year 348 days17. Workers per production line per day 30 per line18. Annual manufacturing worker's salary $50,000 19. Materials costs per disk $20 20. Packaging costs per 10 disks $40

Revisit Income StatementRevisit Income Statement

Allowable costsAllowable costs Sales-force salaries $2.0 millionSales-force salaries $2.0 million Manufacturing salaries $3.0 millionManufacturing salaries $3.0 million Disk materials $5.0 million yen Disk materials $5.0 million yen Packaging $1.0 millionPackaging $1.0 million Shipping $2.5 millionShipping $2.5 million Depreciation 13.3 million Depreciation 13.3 million Allowable administration and overhead costs Allowable administration and overhead costs

$9.2 million yen$9.2 million yen

MilestonesMilestones

Each milestone allows for sets of Each milestone allows for sets of assumptions to be tested and adjusted.assumptions to be tested and adjusted. Stage 1: Preliminary – salaries, shipping costs, Stage 1: Preliminary – salaries, shipping costs,

market size, competitor pricesmarket size, competitor prices Stage 2: Prototyping – materials costs, Stage 2: Prototyping – materials costs,

customer feedback on quality/featurescustomer feedback on quality/features Stage 3: Beta testing – price/qualityStage 3: Beta testing – price/quality Stage 4: Production – sales/production metricsStage 4: Production – sales/production metrics

Expectations for Feasibility Expectations for Feasibility PresentationsPresentations

Exercise 3 (p. 178)Exercise 3 (p. 178) Exercise 4 (p. 184)Exercise 4 (p. 184)

Case StudyCase Study

ZipcarZipcar